Forecasting Volatility in European Stock Markets with Non-Linear GARCH Models

40 Pages Posted: 22 Nov 2002

See all articles by Matteo Manera

Matteo Manera

University of Milan-Bicocca, Italy - Department of Economics, Management and Statistics (DEMS); Fondazione Eni Enrico Mattei (FEEM), Milan, Italy

Gianfranco Forte

Università degli Studi di Milano-Bicocca - Department of Business Administration, Finance, Management and Law

Date Written: November 2002

Abstract

This paper investigates the forecasting performance of three popular variants of the non-linear GARCH models, namely VS-GARCH, GJR-GARCH and Q-GARCH, with the symmetric GARCH(1,1) model as a benchmark. The application involves ten European stock price indexes. Forecasts produced by each non-linear GARCH model and each index are evaluated using a common set of classical criteria, as well as forecast combination techniques with constant and non-constant weights. With respect to the standard GARCH specification, the non-linear models generally lead to better forecasts in terms of both smaller forecast errors and lower biases. In-sample forecast combination regressions are better than those from single Mincer-Zarnowitz regressions. The out-of-sample performance of combining forecasts is less satisfactory, irrespective of the type of weights adopted.

Keywords: Volatility, GARCH, Forecast Evaluation

JEL Classification: A10, C10, C50, G10

Suggested Citation

Manera, Matteo and Forte, Gianfranco, Forecasting Volatility in European Stock Markets with Non-Linear GARCH Models (November 2002). FEEM Working Paper No. 98.2002. Available at SSRN: https://ssrn.com/abstract=351606 or http://dx.doi.org/10.2139/ssrn.351606

Matteo Manera (Contact Author)

University of Milan-Bicocca, Italy - Department of Economics, Management and Statistics (DEMS) ( email )

Via Bicocca degli Arcimboldi, 8
Milan, 20126
Italy
+39 02 6448 5819 (Phone)
+39 02 6448 5878 (Fax)

HOME PAGE: http://www.matteomanera.it

Fondazione Eni Enrico Mattei (FEEM), Milan, Italy ( email )

Corso Magenta, 63
Milan, 20123
Italy
+39 02 520 36944 (Phone)

HOME PAGE: http://www.feem.it

Gianfranco Forte

Università degli Studi di Milano-Bicocca - Department of Business Administration, Finance, Management and Law ( email )

Edificio U7, IV piano
via Bicocca degli Arcimboldi
Milan, MI 8 - 20126
Italy

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